FINANCIAL PLANNING AND GOAL SETTING

FINANCIAL PLANNING

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The Power Of Planning 2 Building your financial future

Step 1: Identify Your Financial Goals 3 Listing goals that will need financial resources

Step 2: Calculate Your Net Worth 6 Accounting for what you own and what you owe

Step 3: Evaluate Your Income 7 Identifying resources to help you achieve your goals

Step 4: Assess Your resources 9 Putting it all together

Step 5: Save For Your Goals 10 Identifying the gaps between your goals and resources

Step 6: Plan Ahead 13 Creating your action plan for next year

Step 7: update 14 Reviewing your plan

TAbLE OF CONTENTSNovember 2009

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Today, individuals are living longer and healthier lives. However, ensuring that you can enjoy a longer and more active retirement makes it imper-ative to establish financial goals and plan ahead for a secure future.

Rising health care costs, changes in employer-sponsored benefit plans and potential future changes in Social Security benefits can affect the quality of your retirement.

Ironically, financial worries derive not necessarily from lack of money, but often from lack of planning. Solid financial planning can take the uncertainty out of your financial future.

This publication will help you begin the process of establishing financial goals and structuring your financial plan. Once you understand the basics, you may want to seek the advice of a Certified finanCial Planner™ (CFP®) practitioner.

Knowing where you are now financially, where you would like to be and what resources you have to make that possible, will help you face the future with confidence.

ThE POWEr OF PLANNING

KNOWING WhErE YOu ArE NOW FINANCIALLY, WhErE YOu

WOuLD LIKE TO bE AND WhAT

rESOurCES YOu hAvE TO mAKE

ThAT POSSIbLE, WILL hELP YOu

FACE ThE FuTurE WITh CONFIDENCE.

Certified finanCial Planner™ is a certification mark owned by the Certified Financial Planner Board of Standards, Inc. This mark is awarded to individuals who success-fully complete the CFP® Board’s initial and ongoing certification requirements.

3STEP 1: IDENTIFY YOur FINANCIAL GOALS

Every financial plan should include savings and investment goals. By establishing goals, you have something to work towards which can help keep you focused.

It is recommended that you target at least 10 percent to 15 percent of your net income to save and invest each month. Generally, the best way to achieve this goal is to pay yourself first by set-ting up an automatic withdrawal that goes directly from your paycheck to a savings or investment account each pay period.

It may be helpful to categorize your financial goals into time periods:

Short-term 3 years or less•Intermediate-term 4–6 years•Long-term 7 years or more•

The following chart is an example that lists some common goals, time frames, amount needed and monthly contribution.

mONThLYFINANCIAL GOAL TImE FrAmE AmOuNT CONTrIbuTION

Note: This example assumes that the credit card is charging 15 percent interest, the savings in- vested for the down payment over 5 years, and for the child’s education over 12 years, are each earning 5 percent annually and that the savings invested for retirement over 30 years is earning 7 percent.

Pay full credit card balance 12 months $ 2,000 $180

Save for down payment on home 5 years $ 20,000 $295

Save for child’s education 12 years $ 50,000 $225

Save for retirement 30 years $300,000 $250

TOTAL PEr mONTh $950

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Consider the following steps to help you plan and potentially reach your financial goals:

Define your goals — What do you want?•Set an amount — How much money do you need for your goal?•Set a target date — When do you need to meet your goal?•Write down your goals — When you write down your goals it helps you assess what you •really need or want.

Prioritize — Prioritizing your goals will help you to develop a plan you can stick to.•Develop a plan — Establish a budget that includes your financial goals.•Review your progress — Periodically review your plan and make adjustments as necessary.•

Use the “Financial Goals Work Sheet” on the following page to list your financial goals.

For example, if your goal is a new home, you may list “new home down payment” as your goal. Next, set the target date by when you would like to achieve the goal. Finally, determine the amount you will need. Allow for inflation, which has been rising 2 percent to 3 percent annually during the past decade.

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When you complete the “Financial Goals Work Sheet,” you are ready to proceed to Step 2.

FINANCIAL GOALS WOrK ShEET

3 YEArS Or LESS 4–6 YEArS 7 YEArS Or mOrEGOAL TImE $ NEEDED TImE $ NEEDED TImE $ NEEDEDExample:New home down payment 5 years $20,000

6 STEP 2: CALCuLATE YOur NET WOrTh

Once you have established your financial goals, the next step is to determine the resources you will need to help you achieve those goals.

Complete the “Personal Financial Statement” to calculate your net worth — the value of every-thing you own minus the value of everything you owe. Use actual market values — what your property would be worth today if you decided to sell it and what your loans would cost you today if you decided to pay them in full.

PErSONAL FINANCIAL STATEmENT

ASSETS (WhAT YOu OWN)

Cash

Checking accounts

Savings accounts

Emergency fund

Money market accounts

Certificates of deposit

Cash value of lifeinsurance policies

Retirement plans

Pension/Profit-sharing plans(money owed you if youleave your employer today)

IRA

401(k)

Keogh plans

Money owed to you

Stocks/Bonds/Mutual funds

Real estate investments

Your home

Other investments

Rental or vacation property

Vehicles

Furniture/Appliances

Jewelry/Furs

Collectibles/Artwork

Miscellaneous property

Other

Total Assets $

LIAbILITIES (WhAT YOu OWE)

Mortgages

Personal loans

Vehicle loans

Credit card debt

Education loans

Investment loans

Life insurance loans

Other

Total Liabilities $

Summary

Total Assets $

Less Total Liabilities $

Net Worth* $

As of (date):

* |f your net worth is negative, you may need to focus on cutting your spending and re- paying your debts.

7STEP 3: EvALuATE YOur INCOmE

Once you have completed your personal financial statement, you should be able to identify the resources available to help you achieve your goals. Net worth is just one aspect of your financial situation.

Income from resources such as salary, investments and retirement are important in helping you to achieve your financial goals. Determine how much is coming in, how much is going out and where it is going. When calculating your personal finances, be sure to include income from all of these resources.

Use the “Income And Expense Summary” on the following page to esti- mate your current monthly income and expenses. It may help to use your bank statements and credit card statements. Record your expen-ditures to analyze your spending habits and make adjustments to help you achieve your financial goals.

When you have completed the “Income And Expense Summary,” you are ready to move on to Step 4.

INCOmE FrOm rESOurCES SuCh AS SALArY, INvESTmENTS AND rETIrEmENT ArE ImPOrTANT IN hELPING YOu TO AChIEvE YOur FINANCIAL GOALS.

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INCOmE AND ExPENSE SummArY

mONThLY INCOmE

Monthly gross income

Other income (spouse, interest, etc.)

Total Monthly Gross Income =$

Deductions FITW — Federal Income Tax Withholding (if applicable)

SITW — State Income Tax Withholding (if applicable)

FICA — Social Security

FICA — Medicare

Other deductions

Total Deductions =$

monthly Net Income (total gross income minus total deductions) =$

ExPENSES

Charitable Giving Place of worship

Savings/Investments (generally target at least 10%–15% of monthly net income)

Emergency fund

Retirement accounts

home/utilities Food

Rent/Mortgage payment

Utilities

Home maintenance

Property taxes (1/12 of total annual expense)

Furniture

Phone/Cell phone

Internet services

Debt Credit card(s) payment

Loan(s) payment

Insurance Auto Insurance

Renters/Homeowners insurance

Life insurance

Health insurance

Disability insurance

Education Tuition

Room/Board/Travel

Books/School supplies/Uniforms

Transportation Vehicle payments

Gasoline/Parking/Tolls

Vehicle maintenance

Registration/License fees (1/12 of total annual expense)

Public transportation

Personal Clothing

Laundry/Dry cleaning

Grooming

Child-care expenses

recreation Vacation(s) (1/12 of total annual expense)

Entertainment/Dining out

Hobbies

Club fees/Organization dues

Cable/Satellite television

Total monthly Expenses =$

Calculate monthly Cash Flow

Monthly Net Income =$

Less Total Monthly Expenses –$

Net Cash Flow (Deficit*) =$

* If your net cash flow is positive, you can save more for emergencies or other financial goals. If negative, you should consider decreasing expenses or increase income (by taking a second job, for example) to reduce or eliminate debt.

9STEP 4: ASSESS YOur rESOurCES

Now that you have identified your financial goals, calculated your net worth and evaluated your income, the next step is to assess all of your resources and begin developing your financial plan.

Emergency Funds And InsuranceThis assessment should begin with a look at your financial foundation. That foundation helps protect you against unexpected losses that might otherwise keep you from meeting your goals.

A strong foundation begins with an emergency fund of easily accessible savings. Most experts recommend this fund should equal 3 to 6 months of basic living expenses to help protect you from unexpected bills or un- employment.

If you do not already have an adequate emergency fund, consider making it a priority on your list of financial goals. Keep your emergency fund in a liquid, easily accessible account such as a savings or money market deposit account.

Unfortunately, even an emergency fund cannot prepare you for cata-strophic loss or illness. Most individuals buy insurance for these costly emergencies.

The most common types of personal insurance include:

Auto.•Personal property.•Homeowners/Renters.•Health.•Life.•Disability.•Personal liability. •

It is important to review your current coverages at least annually to determine if you are adequately covered. Remember to factor in group coverage provided by your employer and government cover- ages such as Medicare, Social Security Disability Insurance and Workers’ Compensation. You should also contact your attorney regarding your estate planning documents including a will, durable power of attorney and health care directives.

ThE uSAA EDuCATIONAL FOuNDATION PubLICATIONS, basic insurance coverages, auto insurance, homeowners insurance, health insur-ance, life insurance AND long-term care, OFFEr mOrE INFOrmATION. SEE “rESOurCES” ON ThE INSIDE bACK COvEr OF ThIS PubLICATION TO OrDEr FrEE COPIES.

10 STEP 5: SAvE FOr YOur GOALS

Once you have established a solid foundation with an emergency fund and insurance, you are ready to begin saving and investing for your financial goals. For this next exercise, you will use the “Sav-ings Goals Work Sheet” on the following page to identify the gaps between your financial goals and your resources. Then take a look for ways to combine the two.

Completing The “Savings Goals Work Sheet”Goals — Record the goals you listed on the “Financial Goals Work Sheet” on page 5.

Target dates — Record the target dates of your goals.

Amount needed — Estimate the amount needed for each goal using today’s dollars. Example: If your goal is to make a 20 percent down payment on a home valued at $100,000 today, you would need $20,000 for the down payment. You would enter $20,000 as the cost of the goal — even if your target date is several years away.

Current assets — Identify any assets on your “Personal Financial Statement” on page 6 you are willing to commit to your goals. Then, indicate how much you would like to allocate to each of your goals. Example: If you have $10,000 saved in a money market deposit account, you may decide to allocate half of it to the down payment. In this case, you would write $5,000 under Current Assets.

Gap — Indicate the gap between the cost of each goal and the assets you have allocated to it.

Number of years to target date — Enter the number of years between now and your target date.

Amount to be saved each year — Divide the gap by the number of years to the target date. That amount will be what you need to save each year to reach your goal.

Total — Add all the amounts to determine the total amount you will need to save annually to reach your goals. This amount does not account for any interest or appreciation/depreciation on the assets identified.

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SAvINGS GOALS WOrK ShEET

NumbEr OF AmOuNT TO TArGET AmOuNT CurrENT YEArS TO bE SAvED GOALS DATES NEEDED ASSETS GAP TArGET DATE EACh YEAr

Example:New homedown payment October 2014 $20,000 $5,000 $15,000 5 $3,000

Total $

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Finding The GapsNow look back at the savings and investments line on your “Income And Expense Summary” on page 8. How does the amount you are currently saving compare to the amount you have deter-mined you should save each year to reach your goals?

Some individuals discover they are saving more than enough to meet or exceed their goals; but for many, the conclusion is much different.

The “Savings Goals Work Sheet” encourages you to work on your goals today. It assumes your pay increases and returns on investments will only keep pace with the rate of inflation.

Adjusting Your PlanHere are some questions to ask yourself if the amount you are now saving falls short of the amount you need to save to reach your goals.

Are you paying yourself first with a disciplined saving and investment program that puts •away at least 10 percent to 15 percent of your net income?

Could you increase the amount you are saving?•Could you earn more and/or spend less?•Are you spending too much on impulse purchases and neglecting long-term savings goals?•Are your goals too ambitious?•Could you change or eliminate any of your goals?•Could you delay any target dates of your goals?•

With these questions in mind, take another look at your “Savings Goals Work Sheet” and at your “Income And Expense Summary.” Make adjustments in both until your actual savings is equal to your goal savings. When you are finished with your adjustments, you should have a savings plan for this year and a forecast for your future.

Remember to repeat this exercise annually. If your income increases, you receive interest and divi- dends, unexpected bonuses or find other ways to accelerate your savings, then you will accelerate your progress toward your goals. Be prepared to modify your goals if you suffer a setback. The key is to remain flexible.

13STEP 6: PLAN AhEAD

Now that you have completed your analysis, it is time to create your action plan for next year.

Your Savings PlanYou can begin by developing your “Savings Plan,” including the amount you plan to save and the method you will use to save it. An effective savings plan begins with these basic elements.

Start saving early. The earlier you begin, the more money you can potentially accumulate.•Save your pay increases. Either put the money into your retirement plan or into another •savings plan.

Establish an automatic savings plan. Have money deducted from your pay or your bank •account and automatically deposited in a savings account.

SAvINGS PLAN

For the year beginning / / and ending / / .

Amount to be saved this year: $

Amount to be saved each month: $

Description of savings methods:

Your Investment PlanNext, examine each of your financial goals to determine whether it is a short-term (3 years or less), intermediate-term (4 to 6 years) or long-term (7 years or more) goal. This will be determined by the length of time you have until the goal’s target date, or until you will need the money allocated to that goal.

For each of your goals, consider how much investment risk you are willing to take for the goal. Generally, the riskier an investment, the more it fluctuates in value. Generally, its potential return may be greater, but so is its potential loss.

To determine how much risk you are willing to take for each of your goals, consider the following.

How essential is the goal? •Can you afford to lose any or all of the money you are investing? •Do you want to protect that money — even if it means potentially lower returns? •

14 STEP 7: uPDATE

Review your financial situation and adjust your goals and plans for reaching them at least once each year and at significant life events — such as graduation, marriage, birth or adoption of a child or purchase of a home. A good time for your annual review is when preparing your federal income tax return when financial records are nearby.

Re-evaluate your life-long goals and anticipate economic factors that affect your plan.

Rate of inflation.•Your federal income tax bracket.•Interest rates. •Overall economic conditions.•

Re-inventory your resources and update your work sheets, so you can see what adjustments you need to make to your financial plan.

Consider Professional AssistanceYou may want to consider working with a Certified finanCial Planner™ (CFP®) practitioner if:

You want to improve your overall financial situation but do not know where to start.•You would like a professional to evaluate your existing financial plan.•You need specialized advice about investment strategies, risk management, estate •planning or adapting your savings plan for changing family circumstances.

You have experienced a specific life event, such as graduation, marriage, birth or adoption •of a child or purchase of a home.

You do not have time to build your own financial plan.•You need help balancing multiple goals, such as saving for college and retirement.•

Selecting The right PlannerMake sure you find the right planner for you and your family.

Ask individuals you respect for names of financial planning professionals they have used. •Ask about the planner’s background and work experience. •Ask as many questions as you need to understand and feel in control of your financial future. •

15NOTES

16 NOTES

17rESOurCES

The USAA Educational Foundation offers the following publications.

mAKING mONEY WOrK FOr YOu (#523)

PLANNING FOr rETIrEmENT (#508)

ESTATE PLANNING (#518)

mANAGING YOur PErSONAL rECOrDS (#506)

rETIrEmENT PLANNING IN YOur 20s AND 30s (#516)

mANAGING CrEDIT AND DEbT (#501)

bASIC INvESTING (#503)

STOCKS AND bONDS (#553)

muTuAL FuNDS (#517)

ANNuITIES (#525)

GET INvESTmENTWISE (#521)

bASIC INSurANCE COvErAGES (#530)

AuTO INSurANCE (#526)

hOmEOWNErS INSurANCE (#558)

hEALTh INSurANCE (#545)

LIFE INSurANCE (#507)

LONG-TErm CArE (#537)

IDENTITY ThEFT (#520)

FINANCING COLLEGE (#513)

To order a free copy of any of these and other publications, visit www.usaaedfoundation.org or call (800) 531-6196.

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